The messy world of goals and targets

If a genie granted you just one wish, you’d have to be very careful what you wished for.

You might ask him to stop human suffering. And he could do it. But he might do this by killing all human beings. (Painlessly and without knowing, of course.)

On that note, I very much enjoyed Tim Harford’s most recent book, Messy: How to be creative and resilient in a tidy-minded world.

Chapter 6, titled “Incentives”, is especially thought provocative and aligns with some of my personal philosophies around goals and targets. In this chapter, Harford discusses “The pitfalls of imposing tidy targets on a messy world”.

Which brings me to goals, targets, and incentives. In this article I am mainly talking about these things in an institutional setting, but many of these comments apply at a personal level as well.

Examples of goals going wild

In Messy, Harford gives several examples where targets had the opposite effect of what was intended:

There have been places where certain hospitals’ and individual surgeons’ outcomes have been publicly disclosed in “report cards”. The idea is that prospective patients should be able to consider this information when deciding whether to go under knife with a specific surgeon in a particular hospital. The outcome? It incentivised surgeons to avoid operations on seriously ill patients, and pursue operations on healthier patients (who may not have even needed the surgery) because it would improve their stats.

In the UK, an initiative was introduced into the DHS, where ambulances were set a time target for responding to emergency calls. The intention was that there would be incentives to increase response times to emergencies. The outcome? “The target… encouraged ambulance services to lie about the stopwatch [there were a disproportionate number of calls that were just within the time frame], to reclassify urgent cases, to put ambulance crews in vehicles that weren’t ambulances, to pull staff out of rural areas, to risk the health and morale of their paramedics, and to celebrate all of this as having hit their target.”

To these, I would add some of the examples set out in “Goals gone wild”.

In the 1990s, Sears, Roebuck and Co set sales targets for auto repair staff of $147 per hour. This “prompted staff to overcharge for work and to complete unnecessary repairs on a company-wide basis”.

Enron executives paid commissions based on revenue rather than profitability or risk. We know how that worked out.

The Ford Pinto was the result of a goal to produce a car that was “under 2,000 pounds and under $2,000”. The goals were met, but at the expense of “safety, ethical behaviour, and company reputation”.

General Motors set a goal at the start of this millennium. The goal was “29”. GM “pledged to recapture 28 percent of the American [car] market”. It started offering “deep discounts and no-interest car loans. The energy and time that might have been applied to the longer-term problem of designing better cars went instead toward selling more of its generally unloved vehicles. As a result, GM was less prepared for the future, and made less money on the cars it did sell. In other words, the world’s largest car company… fell victim to a goal.” Bennett quotes Schweitzer (co-author of “Goals gone wild”): “You clearly don’t want 29 percent market share, you want something much more complicated than that”.

Goals are powerful. For better AND worse

While “[h]undreds of studies conducted in numerous countries and contexts have consistently demonstrated that setting specific, challenging goals can powerfully drive behaviour and boost performance”, it is often the characteristics that make goals so effective that make them “go wild”.

Goals can hurt as well as hinder.

A Knowledge@Wharton article notes that “ambitious goal setting has become endemic in American business practice and scholarship over the last half-century”, despite goals having hazards – “[i]n pursuit of such mandates, employees will ignore sound business practices, risk the company’s reputation and violate ethical standards”.

As the authors of “Goals gone wild” point out, goal setting “has powerful and predictable side effects”. And “in many situations, the damaging effects of goal setting outweigh its benefits”.

Some powerful and predictable side effects of goals and targets

Goals and targets can:

Narrow your focus. Targets and goals can create tunnel vision. This can close us off to opportunities. It prevents us from exploring. It can blind us to our own own best interests.

It might be true that what gets measured gets managed. But what doesn’t get measured can also get missed. A narrow focus can result in people neglecting non-goal areas that are beneficial for themselves and their organisation.

One could argue that making goals broader and more nuanced might address this. But Harford is skeptical about this. He refers to the Basel II accord, which applies to financial organisations such as banks. Harford points out that “making targets more complex doesn’t stop them being gamed – it merely leads to them being gamed in more complex and unpredictable ways”.

Create short-termism. Long-term investment can be sacrificed to hit short-term targets. If all you’re measured on is revenue, why bother with training staff and maintaining your equipment?

Be the wrong goals. A staff member can achieve all of his or her targets, but harm the organisation. If a salesperson is measured by revenue alone, she could hit all of her targets without any consideration for gross profits, expenses, or the risks or compromises associated with generating the revenue.

A classic article in this area is titled “On the folly of rewarding A, while hoping for B”. The title says it all. Harford sums the point up: “we assume that by measuring one thing, we’re really measuring everything. That is delusional. We hit the target, but miss the point.”

An illustration of this is a paper authored by Carol Nickerson, Norbert Schwarz, Ed Diener, and Daniel Kahneman, titled “Zeroing in on the dark side of the American dream: A closer look at the negative consequences of the goal for financial success”. Financial success is a common goal. But consider the finding: “the stronger the goal for financial success, the lower the satisfaction with family life, regardless of household income”. At a personal level, you need to pick the right goals.

Distort risk preferences. This works both ways. It prevents people from trying different approaches and going down rabbit holes that may be productive. Staff may find locally optimal solutions, but not globally optimal solutions. If you’re doing fine cutting grass with scissors, why develop something that would work better?

The converse is also true. If everyone is chasing revenue, what is the chance that unnecessary risks are being shoved under the carpet? High.

Confound effectiveness with luck. Sometimes, good things happen because of sheer, dumb, luck. An example is the salesperson who takes the call when the perfect prospect calls in.

“at least two dozen studies over the last three decades have conclusively shown that people who expect to receive a reward for completing a task or for doing that task successfully simply do not perform as well as those who expect no reward at all. These studies examined rewards for children and adults, males and females, and included tasks ranging from memorizing facts to creative problem-solving to designing collages. In general, the more cognitive sophistication and open-ended thinking that was required, the worse people performed when working for a reward.”

The Knowledge@Wharton article suggests that goal setting is effective “when tasks are routine, easy to monitor and very easy to measure. In practice, many domains are ill suited for goal setting”

Be harmful to relationships and create a corrosive culture. Targets can create:

Silo effects. If you have an organisation with different departments measured to different standards, there is an incentive for one department to take short-cuts that damage other departments.

A culture of competition rather than cooperation. Why help someone if it will hurt the performance I’m measured by?

Create a sense of inequity. Can you really apply the same goals to many different people? And if you idiosyncratically tailor goals to individuals, how do you avoid this leading to unfairness?

Be counter-productive. Have you heard about the “cobra effect”? There is an apocryphal story that the British government was worried about the amount of venomous cobras in Delhi, India. The government offered a bounty for every dead cobra presented. Did this reduce the number of cobras? No. The opposite happened – some entrepreneurs started to breed cobras to kill them and receive a bounty. In short: “solutions” can make things worse.

Focusing on targets can blind employees to the ethical dimensions of the decisions they make. Human beings are also great at rationalising, and targets can create an incentive to rationalise their unethical conduct.

Targets can create incentives for lying or deception. It can encourage certain types of people to try to make it look like they have hit a target when they have missed it. It can encourage charging for hours that weren’t actually worked.

Hurt employee satisfaction, happiness, and sense of self-efficacy

The “Goals gone wild” article cites various papers that show that goals may increase performance, but decrease satisfaction, even with high-quality outcomes.

Targets remove autonomy from a role and corrode feelings of self-efficacy, Self-efficacy is important for engagement, effort, and commitment. External targets are anathema to intrinsic motivation.

If you’re setting targets, knowing that some or all of these aren’t going to be reached, you’re going to make people dissatisfied. It’s mean, and it’s not good for retaining high quality staff.

Goals are like medicine. They need to be prescribed carefully.

I want to be clear: targets and goals can work.

But they need to be implemented carefully, because they can harm as well as help. They don’t always work in the way we intend them.

The authors of “Goals gone wild” state that “managers and scholars [should] conceptualise goal setting as a prescription-strength medication that requires careful dosing, consideration of harmful side effects, and close supervision”.

As with the genie who grants you a wish (or any AI tasked with “maximising paperclps”), you need to be very careful what you wish for when you set targets and goals.

One of the most important tasks in life is picking the right goals.

Do I have my own prescription for selecting goals, and setting them at an institutional level? My thoughts are evolving. But my preliminary thoughts are:

Keep the amount of specific targets to a minimum. The authors of “Goals gone wild” “contend that goal setting has been over-prescribed”. I couldn’t agree more. I don’t think it’s possible to set and calibrate a large number of high quality goals.

Trust yourself, and your people. Intrinsic motivation is a big deal. I think one of the reasons that upper management wants to set targets is the fundamental attribution errror. People [and in particular, managers who set targets] “recognise the importance of intrinsic rewards in motivating themselves, [but] exaggerate the importance of extrinsic rewards in motivating others”. In reality, people have a strong intrinsic motivation to do a great job. Trying to control people by setting too many targets sends the message that you don’t trust them, and you don’t think they’re reliable. The more you measure, the less you trust, and the less you trust, the bigger your problem.

If you’re going to set goals, consider starting with “minimum acceptable contributions”. Unless you want to create dissatisfaction, set bars that people can reach. Make it clear that if they don’t achieve these goals, their role will be in trouble. But expect that they’ll do a lot more.

Be wary of the organisation with the wrong set of goals. This reflects the priorities and culture of the organisation. If it doesn’t align with you, take that message to heart.

A final example and some thoughts

In Messy, Tim Harford talks about Volkswagon (VW) being caught cheating in US emission tests. This was illegal, and was clearly against the spirit of the rules, but Harford inverts the situation. This was a predictable test, and it was widely known that this was an issue. Harford makes the important point that “the real scandal is not that VW found a way to cheat a predictable test. It is that the regulators kept the test so predictable that they were perfectly well aware of the problem”.

Harford also compares this to capital adequacy regulation in the banking industry. He points out that what “What VW did is strikingly similar to what regulators observed in banking, with banks buying unprofitable assets with the specific aim of [satisfying Basel II capital adequacy requirements and] performing well on Federal Reserve stress tests. The banks had a ‘special mode’ to do well on those tests just as VW had a special mode that flattered its emissions. The difference is that what is illegal in a car is apparently legal in a bank”.

And so it goes with specific targets. Setting targets is like trying to test a student’s knowledge at the end of a course, but telling them at the start what the exam questions will be. The best way to test knowledge is to put the onus on the student to learn as much as they can, as thoroughly as they can, so they can answer anything you throw their way.

Harford suggests that we should embrace “randomness in targets”. He says “we should be defining many rules of thumb and deliberately leaving it ambiguous as to which will be used in any given situation.” “The world’s toughest exam isn’t so tough if everyone is carrying a cheat sheet. A simple question from an unexpected direction can prove far more searching.”

The real world is messy. Most valuable tasks are not routine, and they aren’t easy to monitor and measure. Set the right high level targets and goals. Give people flexibility to pursue them. By all means, scrutinise their activities. But to my mind, managing by objectives is not the most effective way to go.

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Sonnie Bailey

Sonnie is an Authorised Financial Adviser (AFA) and former lawyer with experience in the financial services and trustee industries. Sonnie operates Fairhaven Wealth (www.fairhavenwealth.co.nz).

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